House Financial Services Committee Approves PATH Act

The House Financial Services Committee on Wednesday narrowly approved the Protecting American Taxpayers and Homeowners (PATH) Act, a Republican-backed housing finance reform bill that would wind down government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac within five years, replacing them with a securitization platform, significantly reduce the scope of the Federal Housing Administration (FHA), and almost completely privatize the housing finance industry.

The bill, offered by Rep. Jeb Hensarling, R-Texas, who chairs the committee, was passed on a mostly party-line vote of 30-27. Reps. Mike Fitzpatrick, R-Pa., and Gary Miller, R-Calif., were the only Republicans to oppose the bill, according to a Bloomberg News report.

The PATH Act was introduced as an alternative to a bipartisan bill introduced last month by a group of senators led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner. However, unlike the Senate bill, the PATH Act does not include any government guarantee for mortgages securitized through the platform. It would guarantee only loans insured by the FHA and similar agencies.

This is in contrast to the Corker-Warner bill, which would replace the GSEs with a government reinsurer and require private secondary market guarantors to hold capital of 10% of the principal of the underlying securities to cover any first losses. In addition, the Corker-Warner bill would allow the reinsurer to cover a greater share of the losses in the event of another economic downturn.

‘The PATH Act creates a housing finance system that's designed for homeowners so every American who works hard and plays by the rules can have opportunities and choices to buy homes they can afford to keep,’ Rep. Hensarling said in a statement shortly after the committee vote. ‘It creates a housing finance system that's designed for hardworking taxpayers so they never again have to bail out corrupt financial government enterprises like Fannie Mae and Freddie Mac, whose top executives engaged in accounting shenanigans to trigger huge bonuses for themselves. With the reforms in the PATH Act, Americans will finally have a housing finance system that is worthy of them.’

Currently, it is not known if or when the House leadership will vote on the bill. It is likely that House leaders will wait and see if the full Senate plans to take up the Corker-Warner bill before making a decision. Providing the two bills pass, they will need to be reconciled into a final bill, a process that will likely result in substantial and potentially lengthy political debate.

Although the PATH Act stands a chance of passing in the Republican-controlled House, it is unlikely that it would pass in the Senate, as currently drafted, where Democrats hold a majority of the seats. The bill has received strong pushback from Democrats, who say it could cause a substantial rise in interest rates and possibly bring an end to 30-year fixed-rate mortgages – claims Hensarling was quick to defend:

‘â�¦ phasing out Fannie Mae and Freddie Mac will not end the 30-year fixed-rate mortgage since the government-sponsored enterprises are not lenders and such mortgages exist today without a government guarantee,’ Hensarling said in a statement, adding that, ‘relative to current law, the PATH Act will make homeownership more affordable.’